Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting their staggered implementation in 31 U.S. states, we find that they increase angel investment yet have no significant impact on entrepreneurial activity. Two mechanisms explain these results: Crowding out of alternative financing and low sensitivity of professional investors to tax credits. With a large-scale survey and a stylized model, we show that low responsiveness among professional angels may reflect the fat-tailed return distributions that characterize high-growth startups. The results contrast with evidence that direct subsidies to firms have positive effects, raising concerns about promoting entrepreneurship with investor subsidies.
MATTHEW DENES & SABRINA T. HOWELL & FILIPPO MEZZANOTTI & XINXIN WANG & TING XU, 2023. "Investor Tax Credits and Entrepreneurship: Evidence from U.S. States," The Journal of Finance, vol 78(5), pages 2621-2671.